Isolating a measure of inflation expectations for the South African financial market using forward interest rates

The inflation expectations channel of the transmission mechanism is generally recognized as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa, and offers an additional method, which is market-based. The methodologies of Nelson and Siegel and Svensson are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight. Bibliogr., notes, ref., sum. [Journal abstract]

Title: Isolating a measure of inflation expectations for the South African financial market using forward interest rates
Author: Reid, Monique
Year: 2009
Periodical: South African Journal of Economics
Volume: 77
Issue: 3
Pages: 399-413
Language: English
Geographic term: South Africa
Subject: inflation
External link: https://onlinelibrary.wiley.com/doi/10.1111/j.1813-6982.2009.01218.x/pdf
Abstract: The inflation expectations channel of the transmission mechanism is generally recognized as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa, and offers an additional method, which is market-based. The methodologies of Nelson and Siegel and Svensson are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight. Bibliogr., notes, ref., sum. [Journal abstract]